How can construction project participants learn to trust again so that we only need a 2-page contract?
It's a risky business! One of the biggest barriers to change in the construction industry is the lack of trust that exists between all stakeholders. How do we learn to trust again so that we only need a 2-page contract to deliver a $1Bn project?
This is one of the questions that will be discussed at this year’s Future of Construction Summit ‘Disrupted’ #FCON23. Below are some initial thoughts to get the discussion going:
We need commercial relationships that generate trust, not cynicism
Relationships based on trust are rare in the Australian construction sector. The root cause of this lack of trust is the win:lose commercial relationship that traditional contracts create. A win by one party at the expense of the other generates cynicism, not trust.
To create project environments in which trust can be generated, we need to change the win:lose commercial arrangement found in traditional construction contracts to a win:win model.
We can trust people to act in their self interest
We can expect (trust) people to act in their own self-interest.
The primary interest of designers, contractors and other non-owner project participants is to generate a profit level from the contract that is adequate, having regard to the risks and the investments that the participant has made in its capability.
Accordingly, owners can expect (trust) each non-owner participant to do things that will increase the profit margin that they will generate from the contract.
If the contract price is fixed, a non-owner participant can only improve its profit margin by:
reducing the costs it incurs in fulfilling its contract obligations;
making claims for an increase to the contract price when the contract permits it to do so; or
making claims for compensation if the owner breaches the contract or engages in misleading, deceptive or other wrongful conduct in connection with the contract
Accordingly, owners should expect (trust) each non-owner participant to seek to:
deliver only what is required of it, and nothing more that involves additional cost;
minimise the costs it incurs in delivering what is contractually required of it; and
make claims for extra money in circumstances where it is entitled under the contract or by law to do so, and doing so makes commercial sense.
A secondary interest of many non-owner participants is to obtain more work from the client, but only if the work can be performed profitably.
Accordingly, an owner can also expect (trust) that a non-owner participant will do more than what is legally required of it if, and only if:
the non-owner participant thinks that it will be adequately rewarded for doing so (for example, by receiving more work from the owner, that will generate adequate profit over the longer term); or
it is otherwise in the participant’s commercial interests to do so.
On the flip side, the project owner often has several objectives for the project. These typically include:
optimising the whole-of-life cost of the asset, including operating and maintenance costs;
keeping the capital costs within its budget;
completing construction, so that it can use/operate the asset, as soon as possible (or from the planned date);
enhancing the owner’s ‘social licence’ that comes from good community relations, or not eroding it more than necessary;
environmental sustainability;
other social objectives, such as diversity, local industry participation, indigenous involvement and worker wellbeing.
The pursuit of these objectives is against the interests of a non-owner participant under a fixed price contract because every dollar the participant spends pursuing the objective reduces the participant’s profit by one dollar.
If the contract price is fixed, a project owner can only expect (trust) the non-owner participants to spend money pursuing the owner’s objectives if:
the benefits to the non-owner participant of doing so will exceed the additional costs it will incur and the consequent reduction to its profit; or
it is obliged do so in order to fulfil its contractual obligations.
Contractual obligations in respect of such objectives are notoriously difficult to enforce, which means they are often breached with impunity.
Owners that align the contractor’s interests to the owner’s objectives can trust the contractor to pursue those objectives
If the project owner restructures its commercial arrangements with non-owner participants so that their profit margin:
increases when performance against the owner’s objectives is better than expected; and
decreases when performance against these objectives is worse than expected,
then it will be in the non-owner participant’s commercial interests to expend resources pursuing the objectives whilst ever the resultant increase to its profit exceeds the additional costs.
This win:win arrangement can be achieved by replacing the fixed price with a cost plus margin arrangement, where the margin is tied to the outcomes achieved on the owner’s objectives
A project owner that restructures its commercial arrangements with contractors to create this arrangement can expect (trust) the contractor to pursue the owner’s objectives because it will be in the commercial interests of the contractor to do so.
With this trust in place, a two-page contract would be achievable.
